Uber’s change in segments’ names and profitability outlook

Uber announced their Q2 2020 earnings today. Overall, the business was significantly affected by Covid-19. Net loss to the company was $1.8 billion while total bookings were down 35% YoY, and net revenue slumped by 33%. There were on average 55 million monthly active customers, down from 99 million in Q2 2019. The number of trips was down 56% YoY as well.

Zooming in at a deeper level, there are two starkly different stories concerning their Ride and Delivery businesses. Ride gross bookings were down by 75%, contributing to the 66% drop in Ride revenue. Nonetheless. the segment was still the only profitable one at Uber with $50 million in adjusted EBITDA. To get a sense of how Covid-19 affected their Ride business, here is a chart that the company provided in their latest presentation

Figure 1 – Source: Uber

Even with the rise in Eats gross bookings which I will touch upon later, the gross bookings overall were down significantly after 9th March 2020. According to Uber CEO, the company saw recovery in Asia and Europe. Bookings in New Zealand and Hong Kong even exceeded the pre-Covid level at times. Of course, it doesn’t help that the situation in the US where several of their key markets are located is still dragging out.

Uber Eats

Gross bookings from Uber Eats grew by 106% in Q2 2020, resulting in 162% increase YoY in Eats net revenue. While the segment still recorded $232 million loss in EBITDA, it saw a 19% improvement to a year before. The segment now has over 500,000 partnered merchants on its platform. There are also more than 10,000 active merchants that offer grocery, convenience, prescriptions and pharmacy products. Uber reported 3 millions trips completed for Uber Connect since Mid April in 170 cities. Uber Connect allows consumers to send small packages.

Figure 2 – John Erlichman

Name change for segments

The company renamed their two main segments: Ride to Mobility and Eats to Delivery. The move signals a strategic shift in strategy. Mobility covers a lot more than just Ride. Uber doesn’t just want to provide a car ride to consumers. It wants to be associated with all kinds of mobility and transportation. There is already Uber helicopters. Uber has been trying to offer consumers public transportation options on their app as well.

With regard to Uber Delivery, I wrote about how Uber wants to move into the delivery service space with their acquisition of Postmates. Currently, there is also Uber Connect and a new service that allows delivery of groceries. Therefore, Delivery is a more apt name for the segment than just Eats.

If Uber’s ambition wasn’t clear before, it should be now.

Profitability

Personally, I think Uber’s struggle with their Mobility segment is just temporary. Once Covid-19 blows over or a vaccine is available, it will come back to what it was before, a revenue and profit machine for the company. Post Covid-19, as consumers are likely reluctant to use public transportation due to fear of being crammed in a closed space with strangers, there will be likely more demand for Uber’s ride hailing business. In fact, there is already some evidence to support the argument. Aggregate data from Hong Kong, New Zealand and Sweden markets showed some recovery on Mobility bookings compared to pre-Covid levels.

Figure 3 – Source: Uber

Additionally, even though Delivery has been highly unprofitable, Uber is pretty confident in its ability to achieve its long-term target. Here is what Uber CEO had to say on that:

Yes, Ross. As far as the debate goes, we stand firmly on the belief that pure-play delivery companies can and will be profitable. And we think it’s a pretty easy answer, but we don’t think that debate is worthwhile, so to speak. It’s only a question of when and it’s only a question of what question of when and it’s only a question of what those long-term margins will be. We have laid out a long-term margin profile of 15% of ANR and about 33% of EBITDA. We wouldn’t be doing it unless we felt confident there.

To be clear, Belgium is actually one of our smaller countries internationally, and we had said that we’re profitable in 2 of our top 5 international countries. And there are a number of other confident there. countries that that we are also profitable in, but we also wanted to make the point with investors that we’re profitable in countries that count. So it’s not just France and Belgium. It’s other countries.

But when we look from a structural basis or the margins of the business, you fast forward a couple of years now, we think we will be profitable in the vast majority of the countries in which we operate. If we’re not profitable, it’s specifically because we’re trying to achieve something strategically, whether it’s a growth target or we’re trying to expand the number of categories that we’re in, et cetera. So we land firmly on one side of the debate, and we have a lot of data internally and very very high confidence in the teams to win that debate.

Source: Uber Q2 2020 Earnings Call

Despite decimating Uber’s Mobility segment, Covid-19 has been a boost to its Delivery segment as it restricts trips outside of home. Driver incentives in Q2 2020 was only 27% of revenue, down significantly from 43% in Q2 2019. Furthermore, the grocery delivery space Uber is entering isn’t without fierce competitors. Behemoths like Amazon, Walmart or Target all invested in their grocery delivery services. When they announced the acquisition of Postmates, I wasn’t sold on their profitability in the short term. They proved me wrong when their net loss improved from $3 billion in Q1 2020 to $1.8 billion in Q2 2020. If and when Mobility segment returns to its full strength and if Uber can keep their momentum with Delivery, it will be even better for the company.

Bull case for Uber

Uber is now a household name. Years of hype and fast growth around the world while it was still a unicorn startup have made the brand very popular among consumers. It is a competitive advantage that poses challenges to any company that wants to enter the space. Plus, Uber’s global footprint gives it a leg up to those restricted to only one market. Even though a bigger footprint comes with a higher level of risk exposure, it does allow cross-market subsidies and more learning of consumers’ behavior. Uber has been conducting small tests in other markets before bringing new features to a bigger audience. In a business where consumer insight is so valuable, transfer of learning from one market to another is a luxury. To have the same luxury, Uber’s competitors would need to invest in multiple markets and be willing to take the same level of higher risks like Uber does.

Uber competes not only for consumers, but also for drivers. The company’s list of services available to drivers makes it a more attractive option than competitors. In my previous post, I wrote:

Furthermore, it can be a boon to drivers as well. To facilitate all the delivery services it wants, Uber needs drivers. Drivers have limited resources in the number of hours in a day and just one vehicle to drive. Hence, they will prefer working with a partner who can help them maximize revenue as much as possible. With a variety of delivery opportunities, Uber can sell drivers on that promise. In the future where Uber does indeed become an on-demand delivery platform, if a driver is without a Ride customer, he or she can either deliver food, grocery or basically an item ordered by another customer. Minimizing dead time and maximizing income can be an attractive value proposition to drivers.

To compete for drivers with Uber, any new rival would need to offer the same earning opportunities, in the form of either different services or a huge incentive. And that would require a lot of capital and years of investment.

With a variety of services thrown at consumers, Uber wants to establish a connection and relationship with users by being front and center in their lives, whether it’s ordering a ride, wanting to get some food from a restaurant, looking up a public transportation schedule, sending stuff to loved ones or fetching groceries. Once a connection is established, it will be a massive challenge for its competitors to overcome.

All Uber has been doing is to build its innovation stack. The more layers of the stack there are, the bigger their competitive moat is. However, execution is key, especially when it keeps moving the goal post in terms of profitability timeline and amid cash flow pressure.

Apple’s latest move to increase services revenue

Yesterday, Bloomberg reported that Apple made a very interesting acquisition of Mobeewave, a fintech startup, for an alleged amount of $100 million. From Bloomberg

Mobeewave’s technology lets shoppers tap their credit card or smartphone on another phone to process a payment. The system works with an app and doesn’t require hardware beyond a Near Field Communications, or NFC, chip, which iPhones have included since 2014.

The Cupertino, California-based technology giant paid about $100 million for the startup, one of the people said. Mobeewave had dozens of employees, and Apple has retained the team, which continues to work out of Montreal, according to the people familiar. They asked not to be identified discussing a private transaction.

What does Mobeewave do?

Mobeewave is a Canadian startup whose technology enables merchants to accept mobile-based contactless payment by just tapping customer contactless credit/debit cards or wallets such as Apple/Samsung Pay on the back of an NFC-enabled device such as iPhone. In partnership with Mobeewave, Samsung launched Samsung POS in Canada in 2019. Participating merchants only needed to download the Samsung POS app onto their phones and go through a quick sign-up process for immediate use of the service. Here is how Samsung POS works:

Benefits from this kind of service include secure payments, reduced costs for merchants and enhanced user experiences. These benefits are particularly attractive to micro merchants such as street artists, small restaurant owners, flee market vendors or delivery drivers to whom every saving is critical. As contactless payments become increasingly popular around the globe, there is a lot of adoption opportunity for technology like Mobeewave’s. In June, Visa report that excluding the US, 60% of global face-to-face transactions were tap-to-pay. In the US, Visa had 190 million tap-to-pay credit cards with the goal of having 300 million by the end of the year. From the merchant side, 80 out of the top 100 enabled tap to pay. Covid-19 aided the adoption of contactless payments and even when the pandemic blows over, I can see that the new trend will be here to stay.

In Canada, Australia and European countries, contactless payments are capped. In Canada, the cap amount is around $CAD 250 while that in Europe is usually €50 EUR, according to Mastercard. In Europe, banks are required to prompt a PIN request when 1) after a customer has five contactless payments or 2) payments total €150 EUR. Though the requirements are aimed to bolster security, they present additional user experience, investment in hardware and security challenges.

What to expect from Mobeewave in terms of security

Mobeewave’s solutions do address the security challenges across markets, including EU. But the most innovation and exciting solution from the startup is the Mobeewave Limitless, which leverages 3D Secure 2.0, a new security standard used for online transactions. With Mobeewave Limitless, a cap on payments as well as a PIN entry are removed. Also, the chargeback and fraud liability are shifted to card issuers, away from merchants.

PIN entry on a consumer off the shelf (COTS) device can present a number of issues when needing to make a high value purchase. Our Mobeewave Limitless™ solution eliminates all of these while shifting the liability of the transaction away from the merchant. With Mobeewave Limitless™, we combine risk mitigation best practices of both card not present and card present technologies…

Eran Hollander, EVP Product at Mobeewave – Per Financial IT

What does it mean for Apple?

Personally, I had some difficulties with Apple Pay at stores in Omaha in the past. For whatever reasons, my attempt to pay with Apple Pay sometimes failed and it wasn’t a nice experience, especially when you left your credit card and wallet home thinking that your iPhone should be sufficient. The acquisition of Mobeewave, I think, will not change much the flow of how a customer uses Apple Pay. If anything, I hope that the technology will make every NFC-equipped device a more reliable POS than the current hardware available on the market.

I think this is a play to increase the Total Addressable Market (TAM) and services revenue for Apple. Reportedly, there are 25 million micro merchants and 5 million merchants in the world. There will be a small cut for Apple for providing this technology to merchants. Even at 0.01% of a transaction value, millions of transactions can result in a nice additional revenue source for Apple. While big name retailers can be a potentially massive market, there are a few operational challenges and quirks to figure out. I don’t expect Apple will reach this kind of market any time soon. If how Apple usually rolls out its products, services and updates teaches me anything, it may take one or two years before we can see Mobeewave available in countries.

Even though Mobeewave technology is available on Android, I won’t be surprised that in the future it will not be. Restricting the technology to only iOS will contract the TAM, but making it available to other app stores presents some challenges: 1/ will Apple create an app that works well on every both iOS, Windows and Android, and maintain it? and 2/ Apple is notoriously known for wanting to keep an iron grip on total user experience. Lending Mobeewave’s technology to other phone manufacturers may not make sense from this perspective.

Apple’s M&A success is something that, in my opinion, goes under the radar quite a bit. They have been pretty successful so far as CNBC noted:

Cook bolstered his point: “An example of that was Touch ID. We bought a company that accelerated a Touch ID at a point.”

There are other examples, too: In 2017, Apple bought Workflow, an automation app, which is now the Shortcuts app built into iPhones. In 2018, it bought Texture, a digital magazine subscription service, which is now the basis of Apple News+. The Animoji avatars users can drop into texts came out of the 2015 acquisition of FaceShift. Siri was the product of an acquisition. Apple’s industry-leading mobile chips are a direct result of the 2008 purchase of P.A. Semi.

Other deals were for companies that are closer to being competitors to Apple. In 2017, Apple bought Beddit, a hardware sleep tracker from Finland. Apple still sells Beddits, and even updated the hardware, but they had a lot of features removed in 2019, and Apple will add sleep tracking as a feature in its latest Apple Watch software this fall.

In short, I see a lot of potential and good things out of this acquisition and am excited to see how it will pan out in the future.

Disclaimer: I own Apple stocks in my personal portfolio.

Amazon – A giant with momentum and growth

On Thursday, Amazon released their Q2 FY 2020 results and it was nothing short of impressive. Below are my notes:

Even during the pandemic, Amazon net sales were $89 billion in Q2, up 40% YoY. In fact, if you look at their net sales in Q2 in the last 5 years, it’s an astounding 31% CAGR.

Figure 1 – Data Source: Amazon. Chart by me

North America still led the way among their three main segments with more than $55 billion in net sales. AWS is now an annualized $43 billion business and responsible for 13% of Amazon’s total net sales. In the last 5 years, CAGR for North America, International and AWS is 33%, 23% and 39%! If you look at a deeper level, online stores were still responsible for the bulk of Amazon’s net sales while 3rd party and AWS were the next two largest segments. Advertising accounted for 5% of Amazon’s net sales. Their shares have stayed largely the same for the past 3 years,

Figure 2- Data Source: Amazon. Chart by me
Figure 3- Data Source: Amazon. Chart by me

AWS continued to account for more than half of Amazon’s operating income. Historically, Amazon lost money on their International front, but in this quarter, the segment recorded $345 million in Operating Income. Total operating income was up to more than $5.8 billion, almost up by 90% YoY. Once again, this was during a pandemic.

Figure 4 – Data Source: Amazon. Chart by me

Shipping costs grew to more than $13.6 billion in Q2 FY 2020, from $4.56 billion in Q2 FY 2017. In the last four years, shipping costs rose at a faster pace (44% CAGR) than the combined net sales of online stores and 3rd party (28%). As share of cost of sales, shipping costs accounted for 26% of total cost of sales (AWS’ cost of sales weren’t recorded here), up from 19.5% in Q2 FY 2017. According to Amazon’s 10Q, here is how they define Cost of Sales

Cost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music.

Source: Amazon’s Q2 FY 2020 10Q

There are two ways to look at Amazon’s shipping costs in my opinion. First of all, the increase in Q2 FY 2020 is likely due to Covid-19. The rising trend can also come from Amazon’s effort and investment in last-mile delivery which is the most expensive delivery type. Amazon is now the fourth largest delivery service as of May 2020. If other retailers want to compete in terms of delivery, this level of commitment and investment will likely await them. In fact, Figure shows the level of capital expenditure by Amazon over the years. Just. Look. At. The. Growth!

Figure 5- Data Source: Amazon. Chart by me

Figure 6 – Source: Koyfin

In business, cash is king and Amazon is a phenomenal cash-generating machine. As of Q2 FY 2020, their operating cash flow trailing twelve months (TTM) stood at $51+ billion, up 42% YoY. Free Cash Flow TTM was almost $32 billion.

Figure 7- Data Source: Amazon. Chart by me

Additionally, AWS’ momentum is reflected in the remaining performance obligation in the last three years. Performance obligations from contracts whose original terms exceed one year stood at $41 billion as of June 2020, up from $16 billion two years ago. It’s indicative of the revenue in pipeline for AWS.

Figure 8- Data Source: Amazon. Chart by me

Lastly, I think this is the first time Amazon broke out their expenses for digital content, including video and music.

The total capitalized costs of video, which is primarily released content, and music as of December 31, 2019 and June 30, 2020 were $5.8 billion and $6.1 billion. Total video and music expense was $1.8 billion and $2.8 billion in Q2 2019 and Q2 2020, and $3.5 billion and $5.2 billion for the six months ended June 30, 2019 and 2020.

Source: Amazon’s Q2 FY 2020 10Q

In summary, I am in awe of Amazon as a well-oiled company. Even at its size, the company seems to have a lot of good things going in their direction and real competitive advantages. The retail and cloud markets are big enough for Amazon to grow more in the future.

Disclaimer: I own Amazon stocks in my personal portfolio.

Where debit meets credit – This debit card features credit card benefits

I came across an interesting startup called Point, which offers Point App and Point Card. Point App is a mobile wallet application from which you can apply for and manage your Point Card. Point Card is a debit card that offers benefits similar to those of a credit card. Benefits include 5x points on subscriptions such as Netflix, Spotify, Hulu and some others, 3x points on food delivery & ride share, 1x points on everything else, no foreign transaction fees and more. Instead of banking on your missing your payments, Point makes money from interchange fees which are a small percentage of your spend and a subscription fee. In order to use Point Card, a customer must pay $7/month or $5/month on an annual plan.

I think this card will be helpful to those who are conscious of their budget and interested in credit-card-like benefits. 47% of Americans carry credit card debt that amounts to $890 billion in total in Q1 2020. Failure to make payments on time results in a high interest which often comes in the range of 13% – 26%. Further inability to make payments repeatedly will put a revolving customer in a vicious cycle as in that case, compounding interests work against him or her. I work for a bank and a credit card issuer and let me tell you: we want you to be delinquent on your credit card debt. It’s a significant source of revenue and profit to issuers. With Point Card, the risk of delinquency is taken away as you can only spend money that you actually have. There is no temptation to make impulsive purchases on credit and break personal budget.

Point Card may not make sense for every one, though. I mean, if you are willing to pay a few bucks a month to have a cool-looking debit card and some nice features that mimic those of Apple Card, by all means. If you want to break even on a $5/month annual subscription at 1x points redemption rate, you’ll need to spend at least $500/month for this investment to make sense financially. If a family puts all utilities, car insurance and subscriptions, and other discretionary expenses on a Point Card, it can easily exceed $500 while the family can avoid the risk of delinquency.

I do think it’s an interesting concept that can appeal to a group of consumers. As a fan of personal finance, I want to see more folks in control of their own finance and stay away from the temptation from card issuers. I hope that as Point scales and continues to be nimble without a big budget in marketing as well as physical branches, it can offer more rewards to attract more customers.

Antitrust hearing with 4 big-tech CEOs

A disappointing hearing

Today, the long anticipated hearing by The House Subcommittee on Antitrust, Commercial, and Administrative Law which features Jeff Bezos, Tim Cook, Sundar Pichai and Mark Zuckerberg, the four powerful CEOs of big tech companies, took place. Suffice to say, I am not surprised at what transpired, but I am pretty disappointed. I don’t think that there is an objective or a desirable outcome from this hearing. While Democratic officials focused more on the issue at hand which concerns antitrust practices by these companies, their Republican colleagues, in particular Representative Matt Gaetz and Jim Jordan, were more interested in an entirely issue: alleged bias and censorship of conservative views on social media. Jim Jordan even compared Apple’s famous 1984 ads campaign to the so-called cancel culture almost 40 years later! Ranking Member Sensenbrenner even mistook Facebook with Twitter when he tried to question Mark Zuckerberg on Twitter’s decision to temporarily suspect Don Jr’s account. You don’t need to spend time on the hearing, but you can get some idea on the quality of this event based on those incidents.

Notwithstanding the difference in pointed questions, every lawmaker in this hearing did more grandstanding than listening. The 5-minute rule is there to ensure that every lawmaker has a chance to ask questions and that witnesses don’t digress. However, the rule’s side effect is that lawmakers don’t wait for witnesses to answer. Instead, they push their own assumptions/allegations on witnesses or just restrict complicated matters to a “Yes/No” question. If this hearing is to uncover how these CEOs approach competition, why is it that they weren’t allowed to talk more and elaborate?

The format of the hearing needs to change in order to yield results. I have a few thoughts in mind on what can be implemented:

  • Every question at a hearing should stick to a topic. Anyone who violates this rule twice should be kicked out of a hearing. For example, Jim Jordan today didn’t ask questions on anti-competition. He threw allegations towards the witnesses on alleged bias to conservatives. So did several other GOPs. How do those questions belong to the Antitrust conversation at hand?
  • Every lawmaker should have 5-10 minutes, but there should only 5-10 questions allowed. A limit on the number of questions can help ensure the quality of questions, give witnesses more time to elaborate and reduce grandstanding. Many issues are complicated and take some explanations.
  • Before a hearing, questions should be compiled in advance on a portal/website and witnesses must answer in writing before appearing in front of lawmakers. Written answers offer witnesses space and time to elaborate and remove the constraints of time. During hearings, lawmakers can just build off of the written answers submitted in advance.
  • Similarly, there should be a collection of follow-up questions that are answered after a hearing.

Not every acquisition of a competitor violates antitrust laws

Facebook and Google were grilled today on their previous acquisitions: Facebook on Instagram, WhatsApp and Google on DoubleClick. I was baffled by this line of question. Take Facebook’s acquisition of Instagram several years ago as an example.

When Facebook paid $1 billion to acquire Instagram in 2012, nobody could be 100% sure that it would be what it is today. At the time of the acquisition, Facebook was already a big player primed for its IPO and heavily invested while even though it was growing fast, Instagram had around 30 million users, generated no revenue and was valued at $500 million. The startup was struggling to grow its team and infrastructure. Joining Facebook did give Instagram benefits on the way to having more than 1 billion users, as the book No Filter noted below

“It was the most dire server problem in company history. Instagram was now important enough to be mentioned in every press story about the meltdown, alongside Pinterest and Netflix. Coworkers, none of whom did that kind of engineering, sent ice cream to the office as support. Sweeney ate several scoops to try to make it through the night, though he accidentally fell asleep multiple times on his keyboard.”

“The infrastructure wasn’t the only problem bubbling up to an intensity the tiny team could barely handle. Spam was everywhere on Instagram. So was troubling and abusive user content, which the community team could no longer finish sifting through in its shifts—and which was starting to appear in their nightmares. Frustration over the financials aside, selling to Facebook might give employees their lives back.”

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

“Systrom gave four reasons. First, he reiterated Zuckerberg’s argument: that Facebook’s stock value was likely to go up, so the value of the acquisition would grow over time. Second, he’d take a large competitor out of the picture. If Facebook took measures to copy Instagram or target the app directly, that would make it a lot more difficult to grow. Third, Instagram would benefit from Facebook’s entire operations infrastructure, not just data centers but also people who already knew how to do all the things Instagram would need to learn in the future.”

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

“So that summer, Zuckerberg directed Javier Olivan, Facebook’s head of growth, to draw up a list of all the ways Instagram was supported by the Facebook app. And then he ordered the supporting tools turned off. Systrom again felt punished for Instagram’s success.

Instagram was also no longer allowed to run free promotions within the Facebook news feed—the ones that told people to download the app because their Facebook friends were already there. That had always brought a steady stream of new users to Instagram.

Another of the new changes would actually mislead Facebook users in an attempt to prevent them from leaving for Instagram. In the past, every time an Instagram user posted with the option to share on Facebook, the photo on Facebook said it came from Instagram, with a link back to the app. Instagram’s analysis showed that between 6 and 8 percent of all original content on Facebook was cross-posted from Instagram. Often, the attribution would be a cue for people to comment on the photo where it was originally posted. But with the change mandated by the growth team, that attribution would disappear, and the photo would seem as if it had been posted to Facebook directly

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

Consolidations in the same industry always involve reduction of competition. The fact that Facebook is a giant company doesn’t make every single acquisition it made illegal or inappropriate. That’s why I don’t get folks are so upset about Facebook’s acquisition of Instagram. I think it’s safe to say that having Instagram at its current size benefits end users, entrepreneurs and small businesses. There is no guarantee that without Facebook, Instagram would have had the same achievement. It’s also worth noting that the FTC, at the time, approved this merger. As a result, why suddenly did this issue become trending again?

Using data to launch private labels isn’t illegal or bad in and of itself

One of the popular themes in this hearing is the use of data from other businesses by big tech companies to launch competing products. Amazon is accused of using data from startups that work with its investment arm and from sellers on its website to launch competing products. First of all, if Amazon violates any confidentiality term to gain illegal access to sensitive data, then yes they should be held accountable. However, I don’t think using aggregate data stemming from activities on its own website to launch private labels is inappropriate or illegal. What do you think Target, Walmart, Kroger or a litany of other retailers do? Where do you think they got intelligence before launching their own private labels? Here is the revenue share by private labels of retailers. The practice went back to several decade. So, why suddenly is it an issue?

Furthermore, even though Amazon has 35%-40% of the US eCommerce, it still has to compete with brick-and-mortar stores. Hence, if you account for physical stores and the whole US retail market, Amazon occupies only 6%, according to Ben Evans. It’s a bit of a Catch-22 situation for lawmakers. Focus on eCommerce alone and it’s not fair. Look at the whole retail segment and Amazon is likely off the hook as they have only 6% of market share. Imagine that as a successful business owner, you were told not to venture in a different segment, how would you feel? You’d probably say: “wait a minute, that’s unAmerican and against capitalism. Why aren’t I allowed to compete in another category just because I was successful in one?”

What I’d have a problem with is if Amazon abuses of its power to promote its private labels without merits. Specifically, if Amazon pushes its own labels which don’t have any positive reviews at all ahead of more established brands with a lot of reviews, then it’s problematic and not in the best interest of consumers. In that case, Amazon’d deserve scrutiny and criticisms.

App Store commissions

I’ll write about this issue in more details later, but here are a few basic points I want to bring up. Every company that plows resources properly into an operation earns the right to make money from such an operation. Even as one of the biggest and richest corporations in the world, Apple should be able to do that too. As a result, when Apple is responsible for manufacturing its own devices and creating the operating systems that include the App Store, Apple earns the right to monetize their effort. It’s unreasonable to expect Apple to run a charity out of the App Store. Whether the 30% or 15% commission is too high warrants a legit discussion, but I strongly disagree with folks who say Apple should just charge developers its cost of running the App Store.

While developers are important, they are just one side of the coin. The other side is Apple customers. Apple needs to ensure that the user experience on the App Store is as pleasant as possible. Otherwise, they wouldn’t sell as many devices and make as much money any more in the near future. That’s why they have guidelines on the App Store. It’s not reasonable to expect Apple let developers do whatever they want when Apple’s brand is on the line. In life, there is no free lunch. Developers shouldn’t expect to leverage Apple’s infrastructure and reach to customers without abiding by their rules. We all know the saying that goes “my house, my rules”, don’t we?

There is a legitimate concern over the inconsistency of Apple’s rule enforcement. The concern is amplified when it comes to select cases in which Apple has a conflict of interest with regard to its own apps. On that front, I do agree Apple should be held accountable and scrutinized by users, developers, media and the authorities.

In summary

The hearing is a waste of time for the most part, in my opinion. There are interesting discoveries revealed by the committee in the documents submitted by the companies; which you can find here, but the format of these hearings needs upgrading and the answers we got today from the CEOs weren’t that meaningful. I do believe that some of the anti-competition claims on big techs should be fleshed out more.

Disclaimer: I own Apple and Amazon stock in my personal portfolio

This sleeping software giant has a lot of room for growth

What does Autodesk do? What were the significant events in the past 5 years?

Founded in 1982 and headquartered in California, Autodesk creates software for professionals in engineering, architecture, construction, manufacturing, media and entertainment industries. Some of you may know Autodesk by its notable product AutoCAD. Basically, what Autodesk is to architects, engineers, manufacturing professionals is what Adobe is to creative folks. See below for a few examples of what Autodesk software can do.

Figure 1 – Some of what you can do with Autodesk software. Photo source: Autodesk

The company’s main business segments include AEC (Architecture, Engineering & Construction), AutoCAD & AutoCAD LT, Manufacturing (MFG) and Media & Entertainment (M&E). Below is a summary of some of the main products offered in each business segment:

Figure 2 – Autodesk Products. Information source: Annual Report FY 2020

In FY 2020, revenue share of these segments was 42% for AEC, 29% for AutoCAD, 22% for MFG and 6% for M&E. Compared to FY2019, share of AEC and AutoCAD increased by 200 and 100 basis points respectively, while that of MFG and M&E decreased.

Regarding distribution, Autodesk employs three different distribution options. Firstly, the company sells products through its online store to end users and through dedicated internal salesforce. Secondly, Autodesk sells directly to resellers who, in turn, sells to end users. The last option is a two-tiered distribution in which Autodesk sells to tier-1 distributors who sells to resellers before products get to end users. Combined, the two largest distributors (Tech Data and Ingram Micro) were responsible for 45% of the company’s revenue in FY2020. Given that indirect sale was 70% of total revenue, those two distributors occupied 64% of the indirect sale.

Geographically, EMEA and the US were Autodesk’s two biggest markets with 40% and 34% share of revenue in fY 2020 respectively, followed by APAC (19%) and other Americas (7%). Emerging economies such as Brazil, China, Russia and India made up 12% of the total revenue. These figures have stayed largely consistent in the last 3 years for the most part.

Just like most software companies, Autodesk traditionally sold their products through perpetual licenses and earned additional revenue through maintenance plans which allowed customers to receive future upgrades. Perpetually-licensed users could use the software forever, but without new features. Companies could buy a multi-user license or a network license.

The transition was first signaled by the current CEO Andrew Anagnost, who was then the Senior VP of Strategy & Marketing. Later, in February 2016, Autodesk announced that it would stop selling standalone licenses. The only way that customers could use its software individually is through a subscription. The announcement was made in advance to smooth out the transitions in the near future. But why did Autodesk move to subscriptions? There are several reasons:

  • Subscriptions allow management to make reliable forecast on the business in terms of revenue and cash flow; which is important to any executives.
  • By continuously delivering new updates and features frequently, Autodesk can increase customer satisfaction. Additionally, Autodesk can also receive customer feedback through data analytics and incorporate such feedback into product development faster.
  • Frequent updates also bring more security .
  • Instead of a hefty sum upfront, a smaller subscription fee makes it easier to convince potential customers to buy in.
  • Plus, customers can easily scale up and down investments on a monthly/yearly basis, if necessary.
  • The longer a customer stays subscribed, the more profitable he or she is. Hence, Autodesk is incentivized to deliver on products and services to keep customers happy & locked in.
  • The company probably took notice of the success of the trailblazer Adobe, which also switched to subscriptions in 2012.

In June 2017, Autodesk revealed a Maintenance-to-Subscription (M2S) which enabled customers on maintenance plans to trade in their seats and credit for subscriptions. At the same time, Autodesk increased the price of maintenance plans to make them financially unattractive to nudge customers towards subscriptions. The company later said that it would retire maintenance plans by 7th August 2021. On the 2020 Analyst Day, Autodesk declared that their transition to subscriptions was complete and the company is now onto the next targets.

Financials and fruits of the switch to subscriptions

In FY 2020, Autodesk recorded its highest revenue ever at almost $3.3 billion, up 27% from FY 2019 which in turn was up 24% from FY 2018. Recurring revenue rose from 46% in 2015 to an astonishing 96% in 2020. Remaining Performance Obligation (RPO), which refers to revenue that is contractually stated, yet realized, in FY 2020 was more than $3.5 billion. Subscription Annual Run Rate, a key performance metric in subscription model, went up to $3.1 billion in FY 2020 from $1.2 billion in FY 2018. Subscription revenue in 2020 stood at $2.7 billion, up 53% YoY, offsetting the decrease in maintenance revenue.

This is the power of subscriptions. The management team can forecast future revenue very reliably. As a result, they can plan ahead for strategic moves and allocate resources accordingly.

In FY 2020, Autodesk delivered $1.36 billion in Free Cash Flow (FCF), meaning that their Fresh Cash Flow Margin (over revenue) was 41%. To put the figures in perspective, in fiscal 2019, Autodesk’s FCF was $310 million. The outstanding growth in FCF showed that the company became much more efficient in generating cash from its operations.

For the first time since 2016, Autodesk was profitable operationally with $343 million in operating income (a tad over 10% operating margin). It was due to the economies of scale when revenue grew substantially and marginal cost was minimal. Furthermore, Autodesk’s operational leverage was higher in 2020.

Expenses as % of revenue rose from 2016 to 2018 and gradually declined in 2019 and 2020. Marketing expense as % of revenue in 2020 was actually a bit lower than that in 2016, and so were other expenses. This proves that even though expenses in absolute dollars increased, the company became more efficient and grew the top line as a faster pace than expenses’ growth.

What is next for Autodesk?

Guidelines till FY2023

On 2020 Analyst Day, Autodesk announced targets for FY2023 that include 16% – 18% Revenue CAGR, $2.4 billion in FCF and 55% – 65% of FCF Margin + Revenue Growth. In the SaaS world, there is a rule of 40 which states that if your FCF and revenue margin combined is 40%, your company’s efficiency is pretty awesome. Hence, Autodesk’s target of 55-65% is pretty incredible.

Noncompliant and legacy users

One of the main initiatives is to convert legacy users who are on perpetual plans and noncompliant users that refer to those who are using Autodesk’s software illegally. According to Autodesk, in addition to the existing 5 million paying subscriptions, there are 12 million noncompliant users and 2 million legacy users. Out of the 12 million noncompliant users, they estimate to have 7 million users that opened their software at least 11 times in the last 90 days and are using a version released in the last 5 years, a population considered to be highly convertible.

There are several initiatives aimed at converting these noncompliant and legacy users, including:

  • Stop offering maintenance plans in 2021
  • Harden student verification process
  • Ban offline activation
  • Switch from serial numbers to named users, a change that can allow corporate IT teams to avoid leaks and control usage
  • Apply concurrent user limits
  • Message target users with in-app messages and emails

Untapped market

Autodesk has a lot of tailwind behind them. Lisa Campbell, Chief Marketing Officer, estimated that in FY2025, the total addressable market (TAM) for Autodesk would be $69 billion. Given that the company’s FY2020 revenue was around $3.3 billion, the estimate implies a lot of room for growth for Autodesk. The confidence stems from favorable trends such as 1) collaboration between professionals from different backgrounds on increasingly complex projects in architecture, manufacturing and construction; 2) digitization in industries that use Autodesk’s products; 3) suburbanization; 4) Building Information Model (BIM) mandates in countries.

Source: Autodesk

In addition, Autodesk can also grow horizontally by expanding its footprint in overseas markets. In some areas, its penetration is still low, signaling that there is a lot of opportunity at play. Take BIM penetration as an example. Building Information Modeling (BIM) is a process that essentially enables Architecture, Engineering and Construction professionals to collaborate effectively and efficiently during the entire construction project. In some countries, there are BIM mandates in construction projects while a growing number of other countries are planning to introduce their own mandates. Below is Autodesk’s map of BIM footprint. Almost all countries where Autodesk’s presence is low are developing countries whose need for building new infrastructure will undoubtedly grow in the future.

Source: Autodesk

Summary

The decision to switch to subscriptions is massive for Autodesk. It enables the company to be more agile and unlock more value for both customers and shareholders. From what I have seen, the future is bright for the company. There are a lot of tailwinds behind Autodesk and the fact that its revenue has grown since the switch to subscriptions signals a positive acceptance from customers. One look at Adobe can offer a bit more perspective. Adobe started its journey to subscription-based model in 2012. Below is how much the company has grown since then

The trend looks familiar. If Adobe’s 2012 is Autodesk’s 2016, the former’s 2016, when its growth really kicked into high gear, can really be Autodesk’s 2020. Hence, Autodesk can likely follow the trajectory of Adobe and grow its top & bottom line further in the years to come.

Disclaimer: This post took me a few days to write. When I first started, I was looking into it as a potential investment. By now, I own the stock in my personal portfolio

Slack’s complaint against Microsoft

Disclaimer: I own Microsoft stocks in my personal portfolio.

Today, Slack filed an antitrust complaint against Microsoft in the EU over Microsoft Teams. Here is what Slack says in their blog

The complaint details Microsoft’s illegal and anti-competitive practice of abusing its market dominance to extinguish competition in breach of European Union competition law. Microsoft has illegally tied its Teams product into its market-dominant Office productivity suite, force installing it for millions, blocking its removal, and hiding the true cost to enterprise customers.

Slack’s objective is to force Microsoft to unbundle Teams from Microsoft Office 365 and sell it as a separate feature. The company reportedly had been discussing legal matters concerning Teams with the US authority for a while (per WSJ), but just decided to launch a formal complaint today. Given what has happened between the EU and big tech companies, it’s not difficult to see why Slack lodged the complaint there. Last year, the EU fined Google almost 1.5 billion euros for abusive practices in online advertising. It is also looking into Apple’s antitrust behavior with App Store rules. In 2004, Microsoft was fined half a billion euros for bundling Windows Media Player into its Windows. Perhaps, Slack is banking on the fact that the precedent and the current events as of late will be favorable to them in this case.

When I read the main part of the complain above, I was a bit surprised. My company is a bank in a highly regulated industry. We use licensed Microsoft Office 365, yet Cisco Jabber, not Teams, is our chat and video application. I don’t have a lot of confidence in our IT department to think that they can go around Microsoft and remove Teams if it’s not allowed by the Seattle-based company. In fact, if you look at how Teams is marketed, you will see that there are options to customers. There are three ways to get Teams: Office 365 Enterprise, Microsoft 365 Business and Microsoft 365 Enterprise. I know it’s not the easiest thing in the world to differentiate between the three, but here are the plans

Figure 1 – Office 365 Enterprise. Source: Microsoft

Figure 2 – Microsoft 365 Business. Source: Microsoft

Figure 3 – Microsoft 365 Enterprise. Source: Microsoft

As you can see from the three figures above, customers have at least one option in each category that allows them to use Microsoft Office 365 without Teams. To be clear, the screenshots above do not capture all features under each plan. It’s plausible that the other features which are not shown can force businesses to choose plans that only come with Teams. As a result, there are two points I want to make:

  • On the surface, the claim that Teams is forced on customers doesn’t seem true. Customers do have a choice to use Teams or not.
  • If Microsoft uses some indirect tactics to force Teams on customers, the onus is on Slack to prove it. However, the fact that companies whose products compete with Microsoft’s such as Slack, Cisco, Zoom, AirTable or Tableau, just to name a few, have a market does seem to me that it’s entirely possible to use non-Microsoft applications in addition to the popular Microsoft Office.

From Microsoft’s side, the company issued this following statement:

We created Teams to combine the ability to collaborate with the ability to connect via video, because that’s what people want. With COVID-19, the market has embraced Teams in record numbers while Slack suffered from its absence of video-conferencing. We’re committed to offering customers not only the best of new innovation, but a wide variety of choice in how they purchase and use the product.

source: Techcrunch

A big advantage that Microsoft has over Slack when selling a competing product is that the former, in most cases, already has an established relationship with customers through Microsoft Office and other products. To sign any customer, Slack has to cultivate the relationship from scratch. The task is even made more difficult when Slack has to convince potential customers to make additional investments, on top of what they already pay for Microsoft applications. Imagine if a company already pays from $5 to $35/month for every one of hundreds of employees to use Microsoft Office, in case Teams is included, there has to be a very good reason why it should incur more expenses to use Slack.

The last publicly revealed figures put Microsoft Teams and Slack at 75 million and 12 million daily active users, respectively. Microsoft revealed that in Q4 FY 2020, there were 69 organizations that had more than 100,000 users of Teams, up from 20 organizations in Q3 FY 2020. In the past, Slack insisted that Microsoft Teams isn’t a true competitor to their product; a claim that I found bewildering. It’s clear that Slack has a big problem at hand and the fact that they are formally complaining about Teams contradicts the previous claim.

I am all for competition as it benefits end users. If Microsoft deployed underhanded tactics during negotiations with companies and it’s not publicly known or if Slack can prove that the dizzying and head-scratching offerings by Microsoft indirectly force customers’ hands, by all means, I do think Microsoft should be held accountable. However, I am not convinced that it’s harmful to the end users that Microsoft can offer value through bundling and establish a direct relationship with customers more easily than Slack. Microsoft has to invest a lot of resources in building and maintaining a lot of other features, not just Teams.

The difference between the 2004 case and this, I suspect, is that Microsoft didn’t give users a choice whether they wanted to install Windows Media Player while they do with Teams, at least on the surface. My guess is that Slack’s complaint won’t go any far, but it’ll be interesting to see how this actually pans out.

What do you think about this complaint from Slack? Let me know in the comment. Have a good day and stay safe!

What if Twitter has a subscription service?

What is Twitter? What’s the appeal?

Twitter is a platform for knowledge and interests. It allows you to do two things very well: 1/ be updated on what happens immediately and 2/ have access to experts in various areas. Anything that happens in life breaks first on Twitter. Not on Facebook. Not on Instagram. Not on LinkedIn. Secondly, you are more likely to communicate with folks that you wouldn’t know about or be able to talk to in real life. Take the tweet below as an example. Somebody had a question for three CEOs of three rocket companies, including Elon Musk – one of the richest men on Earth. All three responded. How likely would you get the same outcome with cold calls and emails?

Figure 1

The unique appeal of Twitter brings it a lot of royal fans and powerful users who are more than willing to share perspectives and expertise for free on the platform. That’s the level of user engagement and culture that other networks strive to have. Personally, I was late to Twitter. I have been using the platform since I came to the US and boy, did I wish I had started earlier. I have learned so much about business, strategy, fin tech, personal finance and much more from friends and strangers on Twitter.

How does Twitter make money? Since the site is free to all users, Twitter generates most of its revenue through ads. Revenue in Q1 2020 was $808 million with 84% of the pile coming from advertising. While revenue is on an upward trend, it comes with a lot of baggage. Twitter has been on the receiving end of several controversies related to the struggle to balance Free Speech and user safety. Despite bringing a significant amount of money, political ads is highly controversial, especially when this is an election year, when the country is more divided than ever and when politicians are distributing acutely questionable information.

Figure 2 – Source: Twitter

Twitter subscription?

Somebody with eagle eyes on Twitter noticed this job posting by the social network that specifically mentioned a subscription service. The idea of a Twitter subscription isn’t new. It has been around for a while and it heats up again when the job ad was spotted. It makes sense for Twitter to launch a subscription.

Figure 3

1/ Another source of revenue will help the platform less rely on advertising money and reduce the risk of such over-reliance. To be clear, I don’t think Twitter will introduce its own subscription as a gateway to force users to pay to use the service. The whole appeal of Twitter to advertisers is access to potential customers. A Twitter-owned subscription would drive users away and put those lucrative ads dollars in jeopardy. Instead, it’s more like a subscription for powerful influencers whose content is valuable enough to make readers pay to read. As of Q1 2020, Twitter has 166 million daily active users. Even a fraction of that base has subscriptions and Twitter shares a piece of that money, it can still be a significant sum over time. Take this user as an example. His tweets that come from his background of national security are only available to people who pay him $10/month. I do think this is the model that Twitter may have in mind.

Figure 4 – Source: Premosocial

2/ A lot of writers whose content is hosted on other sites use Twitter to advertise and reach out to target audience. For instance, if you have expertise in one specific area and usually blog about it, Twitter is a great source of like-minded audience who is likely to like and pay for your content. In that case, Twitter offers quality traffic, but no share of revenue. As a micro blogging site itself where folks write down thoughts and construct impressively long threads, Twitter may wonder why they don’t host the content, facilitate the subscriptions itself and get paid in the process.

What are the implications of a Twitter subscription?

Engagement

At first, I was concerned about what a subscription service would do the engagement on Twitter. The user culture on Twitter is the culture of selfless sharing. Experts share their knowledge and perspectives without compensation. If the majority of experts in one specific area hid all their great content behind pay walls, that would adversely affect the user culture that Twitter painstakingly built. It takes a long time to build a culture, yet it’s pretty darn fast to ruin one.

A counterpoint to the argument above uses precisely the same user culture element. It is possible that despite the presence of a subscription and financial temptation, power users on Twitter just keep offering their content for free. Even if some decided to restrict access to their content, the vibrant activity on Twitter might not be affected much.

Figure 5

Figure above demonstrates what I consider a potentially basic dynamic on subscription-equipped Twitter. On the left hand side, we have casual users who consumer content and produce on a personal basis. On the right hand side, we have influencers who have authority, brand names and appeal to attract subscriptions. Influencers can have two types of content. One is available for free to the public while the other is only to paid subscribers.

Let’s say Influencer A is famous and upon the introduction of the subscription option, starts to tweet his valuable content behind a paywall. Even though some hardcore fans are willing to pay to read his/her content, the overall engagement will likely go down. It creates an opportunity for Influencer B, who is new and wants to build his/her credibility by tweeting out more to the public or Influencer C, who decides to strive the balance of making subscriptions worthwhile and interacting with the public.

In short, I think there is a likelihood that the subscriptions would not drive users away. There is enough supply for valuable content in any given area to satisfy the demand.

Investments in new features

Building out a subscription for users would likely necessitate big changes to the product. I don’t know about other users, but I don’t particularly enjoy tweet storms. It’s tiring to read a long thread. To facilitate the production of content, Twitter may have to build out features to allow long-term writing, and enable Influencers to manage subscribers, payments and their emails. All require investments and allocation of resources, but there is a huge upside in my opinion.

In sum, I am excited about a potential subscription feature on Twitter. Great minds should be rewarded and so should Twitter for building a great product and user culture. The world is getting increasingly more complicated and noisy. There is always a place for people who can help others make more sense of the world and understand concepts better. Internet is a great way to build up credibility and receive feedback. Twitter, as a platform of interests and knowledge, is well-positioned to take advantage of that trend. You have seen the popularity of blogs, newsletter and platforms like Substack. Twitter can follow their examples while retaining their unique value propositions. Though it’s legitimate to be concerned about the engagement of Twitter once subscriptions are available, I do think the platform has built a strong enough relationship with its users that such a concern won’t materialize.

What do you think about a Twitter with subscriptions? Let me know if you agree or disagree with my thoughts above. Stay safe and have a good day!

AirBnb CEO on how Covid-19 changed travel and what is going on with the company

AirBnb CEO Brian Chesky had an interview with Bloomberg two days ago. First of all, I think Brian seemed very real and genuine in this interview. Watching him speak didn’t give me a sense that he was a robot reading script or a politician giving all kinds of lip services or false hope. For example, he admitted to being unfocused in the past, working on too many things at AirBnb at the same time. He also publicly committed to publishing data on diversity at AirBnb one year from now. That kind of genuineness and down-to-Earth attitude are refreshing to see. He talked about his commitment to diversity & equality, how he thinks about IPO this year, what mistake he made while running AirBnb, Online Experience, how Covid-19 changed travel behavior and so on. But I will only discuss two topics as follows:

How Covid-19 changed travel

While many people said that travel pre-Covid as we knew it is forever gone and we will never see it again, I am much less certain on that. Humans are quick to forget. Once we have the vaccine or have this virus under control, no matter how many years that will take, I think we can get back to where we were travel-behavior-wise. Things tend to be cyclical, you know. Nonetheless, Brian talked about what he has seen in terms of behavioral changes of travelers:

  • Business travel will take a lot longer to recover
  • EU has recovered solidly from the pandemic. Asia started the recovery path. Latin America hasn’t recovered much. He said that the US “has been really really strong” and it “has seen a temporary recovery”. I am not quite sure how to think about it. The US has repeatedly seen a new high on the number of cases in a day for quite a while now. Even if a portion of the population traveled, what would that do to the full recovery? Would take delay the recovery much longer?
  • Less interest in travel to urban areas with dense population and in cross-border travel
  • Travel will be more local

For the foreseeable future, there will be major changes in how businesses operate in the tourism industry. Attractions will have to take into account social distancing when designing tours. Travel agencies will have to arrange transportation for small groups only and avoid trips to crowded places. Hotels or AirBnb hosts will have to increase the hygiene level and how to communicate that to travelers.

If you look at countries whose tourism plays a huge part in the overall economy such as France or Italy, they were decimated by the pandemic. However, they have recovered since and started to take on tourists. The picture is very different for the US. Not only does nobody want to travel here at this time, unless they absolutely have to, but the people living here are now banned from visiting Europe. The lack of commitment to take on short-term losses for future prospects and, by extension, the absolutely atrocious handling of this pandemic are setting this country back months in recovery and perhaps even longer for the US tourism industry.

Online Experiences

AirBnb launched Online Experiences in April 2020 due to the pandemic. The service allows hosts to craft a unique experience online for a small group of guests. After reservations are confirmed, guests receive a Zoom invitation through which they can live participate in the Experience. For instance, you can book to learn how to cook with this Michelin chef from Italy in a live stream session along with 9 other people around the globe without leaving your home. All you need to do is to make a reservation, prepare ingredients beforehand and join the Zoom session.

Source: AirBnb

Brian Chesky said that it is the fastest growing product of AirBnb, even though he didn’t specify whether it’s the fastest growing product ever or it’s just during the pandemic. He did reveal that the service has had 400 Experiences listed so far and generated $1 million in bookings.

AirBnb is quick to improvise and pivot during this pandemic that severely affects travel. I can see some value in this service. Firstly, for folks who feel lonely during this crisis (and there are a lot of them), this is a great and inexpensive way to meet new people and learn something useful without enduring more risks. The live stream format is key because if this were an on-demand video clip like what we have with streamers like Netflix, it wouldn’t work. There needs to be a real and tailored human interaction. That’s why I think it makes sense to limit the number of participants to maximize the interaction with each person.

Secondly, take Vietnam as an example. Our borders have been closed for months. Hosts can take advantage of this opportunity to offer local tours or experiences and gain revenue that wouldn’t have been possible otherwise.

Regarding the future prospect of this service, I am not convinced yet. Covid-19 necessitates online interaction. However, when this blows over, though it may take some time, how much will people still prefer online interaction and how much time will they have for these experiences? There are many other services that can offer similar online lessons. Once people are free to leave home, they no longer need some strangers on the Internet to bond with to alleviate the loneliness as there are countless distractions. I don’t have any data, but that $1 million bookings in 3 months globally seems a bit soft. Furthermore, the live stream nature and the small group requirement of this service don’t necessarily let host scale their revenue. They are constrained by their time, being the presenter physically and the number of participants. Hence, I suspect that revenue from Online Experiences may just shift to Experiences post-Covid.

In sum, it will be interesting to see what the future holds for the tourism industry and AirBnb, in particular. The pandemic threw its plan to go public in the trash bin and significantly altered its business. If you are interested in the company, have a listen to Brian’s talk. Once again, I really like his down-to-Earth tone and genuineness.

Uber’s latest chess moves

In the last few days, Uber made two major announcements: 1/ they bought Postmates for more than $2.6 billion and 2/ they are entering the grocery delivery market. In this post, I’ll lay out my thoughts on the two moves.

Uber Then vs Uber Now

In the early days, growth at all costs was Uber’s mantra. The company tried to grow fast and aggressively in many markets around the globe, with just one service: ride hailing. Even though it made the brand a household name and raised a lot of hype for the company before its IPO, there were major problems with that strategy:

  • Uber had to subsidize rides a lot to attract drivers and users. Consequently, the company burned a lot of money, especially in markets where Uber didn’t have advantage over local competitors
  • There was no stickiness with riders who could change services on a whim. Acquiring customers is one thing. Keeping them loyal is a totally different matter.

After the current CEO, Dara Khosrowshahi, took over from its co-founder, there was a shift in strategy. Instead of stretching itself too thin in many markets and bleeding cash, Uber scaled back in markets where it was not a market leader. Uber sold its operations in South East Asia and Russia to its competitors while exiting some markets altogether.

Over time, Uber has tried to deepen its relationship with customers and expand its revenue stream by offering other services such as Uber Eats, Uber Freight, Uber Bikes, Uber Elevate, Uber Business, Uber Rewards, Uber Cash and an unnamed grocery delivery. Uber’s ambition, in their own words, is “bringing you closer to the things you need, all in one place“.

Despite the change in strategy and introduction of more services, profitability has still eluded Uber. In Q1 2020, Uber reported a net loss of more than $2.9 billion. Those numbers already included the performance of two strong months in January and February, and they were achieved even before the pandemic entered its most critical phase. While Covid-19 boosted Uber Eats business as revenue for the segment in Q1 2020 increased by 53% and Q2 bookings grew by 100% YoY, it thoroughly decimated the ride business which is the only profitable segment in Uber’s operation. The situation was dire enough to force a layoff of 14% of its workforce. But the show must go on and Uber had to find a way to generate revenue and keep the lights on.

How will these moves help Uber?

Postmates is an on-demand delivery service founded in 2011. Here is how the company described itself: “Able to deliver anything from anywhere, Postmates is the food delivery, grocery delivery, whatever-you-can-think-of delivery app to bring what you crave right to your door”. Essentially, Postmates generates revenue by charging a percentage of an order’s value as well as a fixed delivery fee to customers, and by taking a small fee from merchants who want access to an expanded customer base.

The acquisition of Postmates gives Uber an immediate boost in terms of market share. By absorbing 8% market share from the acquired, Uber will become the #2 player in food delivery market with 37% market share, behind the leader Doordash. Plus, Postmates’ strong presence in the lucrative Southwest area of the US gives Uber access to an important market with reduced competition. While the deal may look forced by the current pandemic, I think there is more to it, than just consolidating the market, cost synergy or reducing competition.

The CEO of Postmates said in 2015: “The idea behind Postmates is what if you can use the city as a warehouse”. Last-mile delivery is notoriously difficult and expensive for brick-and-mortars to master. While they can certainly work with Amazon, there is always fear that the Seattle-based company can turn around and develop its own competing private label products. Uber can be an enticing alternative as it is unlikely that the ride hailing app will develop its own products to compete with retailers. Instead, Uber can be a last-mile delivery partner to brands without having to build warehouses itself, leveraging the drivers in its network. That’s a potentially huge opportunity. Even though Uber may use its own infrastructure and resources to build something similar to Postmates, why wasting valuable time when they can gain the necessary skillset quicker with an acquisition?

This transaction brings together Uber’s global Rides and Eats platform with Postmates’ distinctive delivery business in the U.S. Postmates is highly complementary to Uber Eats, with differentiated geographic focus areas and customer demographics, and Postmates’ strong relationships with small- and medium-sized restaurants, particularly local favorites that draw customers to the Postmates brand. Additionally, Postmates has been an early pioneer of “delivery-as-a-service,” which complements Uber’s growing efforts in the delivery of groceries, essentials, and other goods.

Source: Uber

This is also a play to create stickiness with customers. Imagine this scenario: you are about to leave work for home. You order an Uber and while you’re waiting for your ride or while you are already in the car, you open Uber app and have your grocery or a new appliance ordered and delivered to your home. These transactions will help accrue cash back in your Uber Cash, which can later be used in the future for more services. By offering multiple choices and services under one app, Uber does two things: 1/ make competitors that offer few choices like Lyft less attractive and 2/ allow customers the convenience of not having to open multiple apps.

Furthermore, it can be a boon to drivers as well. To facilitate all the delivery services it wants, Uber needs drivers. Drivers have limited resources in the number of hours in a day and just one vehicle to drive. Hence, they will prefer working with a partner who can help them maximize revenue as much as possible. With a variety of delivery opportunities, Uber can sell drivers on that promise. In the future where Uber does indeed become an on-demand delivery platform, if a driver is without a Ride customer, he or she can either deliver food, grocery or basically an item ordered by another customer. Minimizing dead time and maximizing income can be an attractive value proposition to drivers.

It’s not an all rosy prospect

Uber’s ambition is without challenges. Take grocery delivery as an example. Heavyweights such as Walmart, Amazon or Target all invest in their delivery capabilities. It will not be easy or cheap to enter a highly competitive field with these behemoths. While these strategic initiatives may make sense to me, I do think Uber may not be any closer to profitability. In fact, they may even suffer more losses in the short term.

Postmates had its own controversies with lawmakers and its own workers in the past. The future “delivery-as-a-service” vision of Uber doesn’t change the core model. It uses the same model and expands the scope. As a result, run-ins with gig workers and lawmakers will likely happen more often in the future.